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Upbeat RBA keeps rates at 0.75pc

The Reserve Bank of Australia has given what economists call an "exceedingly optimistic" outlook for the economy by reconfirming its growth forecasts and keeping the official interest rate at 0.75 per cent, despite hits from bushfires and the coronavirus.

RBA governor Philip Lowe warned that in the short term, "the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth. It is too early to determine how long-lasting the impact will be."

Financial markets had priced in only a 28 per cent chance of a rate cut, although that was up from 10 per cent last week. David Rowe

However, he said last year's three interest rate cuts were improving employment, lifting inflation and setting up a residential construction recovery later this year, helping to keep its 2.75 per cent growth forecast intact.

"With interest rates having already been reduced to a very low level and recognising the long and variable lags in the transmission of monetary policy, the board decided to hold the cash rate steady at this meeting," Dr Lowe said.

"The easing of monetary policy last year is supporting employment and income growth in Australia and a return of inflation to the medium-term target range."

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The Australian dollar jumped after the board's decision, rising to US67.24¢ from US66.88¢.

Westpac chief economist Bill Evan said it was "somewhat brave" that the central bank maintained its growth forecasts, while NAB chief economist Alan Oster called the RBA's outlook "exceedingly optimistic" considering the impact of the bushfires and coronavirus.

April rate cut

All of the big four bank economists expect a 0.25 percentage point rate cut will be needed in April. Financial markets are pricing in a 66 per cent chance of an April rate cut.

AMP Capital chief economist Shane Oliver said the RBA forecast was potentially underplaying the threat of the bushfires and coronavirus.

"While we mostly agree with the RBA that the drag on growth from the bushfires and the coronavirus will be short term and temporary, it is likely to be more significant than the RBA is allowing for," Dr Oliver said.

"And the risk is that it will linger longer, particularly given the threat that both pose to tourism."

"This seems very optimistic given the combined drag from recent events and the retail and residential construction headwinds currently facing the economy – we think momentum will be around 2.2 per cent," Ms Hunter said. "We’re much less optimistic than the board about the outlook for the economy."

Shift in RBA tone

While the RBA provided an upbeat assessment, it qualified this with the suggestion it could still cut rates further to achieve its targets.

"[The board] remains prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time," it said.

"Progress is expected towards the inflation target and towards full employment, but that progress is expected to remain gradual.

"A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3 per cent target range."

The RBA noted that globally there were some further rate cuts to come.

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"There is an expectation of a little further monetary easing in some economies," it said.

Citi economist Josh Williamson detected changes in the RBA's language that were designed to give the central bank more breathing room before cutting rates.

The use of phrases such as “consumption growth is expected to pick up gradually” and “progress is expected towards the inflation target and towards full employment" were viewed by Citi as being part of Dr Lowe's observation of a "gentle turning point" in the economy.

"It will probably take at least a few months of data for these views to be tested, giving the RBA more time to keep the cash rate on hold," Mr Williamson said.

"Our view is that the RBA remains a reluctant rate cutter, and by reaffirming its ‘gentle turning point’ story, the bank is probably looking to enter a holding pattern with its current monetary policy settings."

Treasurer Josh Frydenberg jumped on the RBA's optimism, saying the government's disciplined fiscal management would allow it to balance any risks to the economy from such shocks.

"Australia is in a strong position to respond to the challenges we face as responsible budget management has given us the ability to respond to economic shocks without increasing taxes or cutting essential services," he said.

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"The RBA in their statement today said they expect the economy to strengthen over the next two years, growing by 2.75 per cent this year and 3 per cent next year, notwithstanding domestic and global headwinds. This outlook is consistent with the forecasts the government laid out in the 2019-20 [budget update]."

However, the government is feeling pressure itself after last Friday revealing its budget position was more than $1 billion below what the Treasury had forecast just over a month ago.

Shadow Treasurer Jim Chalmers picked out Dr Lowe's statement that “the household sector has been adjusting to a protracted period of slow wages growth” which “is expected to remain at around its current rate for some time yet”.

"For too long the Prime Minister and Treasurer have recklessly left the Reserve Bank to do all the work instead of coming up with a plan to support the economy."

More than 10,000 people poured into the nation's capital on the ninth day of protests over police brutality, but what awaited them was a city that no longer felt as if it was being occupied by its own country's military.